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JPMorgan Penalized by Regulator in Britain

LONDON — JPMorgan Chase was fined a record £33.32 million ($48.6 million) on Thursday by the financial regulator in Britain for failing to keep client funds separate from the firm’s money.

The Financial Services Authority said that the bank’s J.P. Morgan Securities unit had not adequately protected billions of dollars in client money held by its futures and options business.

The error, which occurred after the merger of JPMorgan and Chase forming JPMorgan Chase and remained undetected for nearly seven years, put the client funds at risk had the firm become insolvent, the regulator said.

JPMorgan Chase reported the issue to the regulator once it discovered the error last July but some analysts said the episode left both the regulator and JPMorgan in a bad light because the error went undetected for so long.

“Even if it’s an oversight, the fact that it’s such a large amount and it went on for seven years makes me scared stiff,” said Tamar Frankel, a professor at Boston University’s School of Law.

J.P. Morgan failed to separate client funds worth $1.9 billion to $23 billion from 2002 until July 2009, according to the regulator. The regulator said the fine is meant to “send out a strong message to firms of all sizes that they must ensure client money is segregated” and added that it had “several more cases in the pipeline.”

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Margaret Cole.Credit
Jonathan Player for The New York Times

The bank qualified for a 30 percent discount on the fine because it had “worked constructively” with the agency during the investigation and had agreed to settle at an early stage, the regulator said. No clients suffered any losses, the regulatory agency said.

“J.P. Morgan Securities committed a serious breach of our client rules by failing to segregate billions of dollars of its clients’ money for nearly seven years,” the agency’s director of enforcement and financial crime, Margaret Cole, said in a statement. “The penalty reflects the amount of client money involved in this breach.”

In an internal memorandum sent to employees Thursday and obtained by The New York Times, Daniel Pinto, chief executive of JPMorgan Securities, wrote that the error “was not deliberate” but it “did breach the F.S.A.’s client money rules, which we regret.”

He added that he was “proud of the manner in which the firm has conducted itself since discovering it;” a fact also acknowledged by the regulatory agency. “We realize that many of your clients will likely have questions related to this settlement,” the memo said. A JPMorgan spokesman, David Wells, declined to comment.

The regulatory agency has stepped up its enforcement activities over the last year, handing out more and bigger fines to financial institutions and individuals. After being criticized for missing early warning signs that British lenders were taking too much risk ahead of the subprime crisis, the agency is now looking to improve its track record in protecting clients of financial services firms and the stability of the banking system.

The new coalition government in Britain plans to move some of the regulator’s enforcement powers to a newly created agency that would focus on white-collar crime. The step would not abolish the regulatory agency, which the Conservative party had previously pledged to do, but it splits an increasingly important part of the regulator into a separate organization.

The error came to light on July 8 during conversations among senior staff about contributions to Treasury financing by the futures and options business, the regulatory agency wrote in a summary of its findings dated May 25.

“F.& O.’s view was that most of F.& O. money would be client money, whereas Treasury explained that it did not know that F.& O. money was client money,” according to the report, which referred to the futures and options business. “The error remained undetected because F.& O. operations had not implemented any overarching control processes to confirm that all client money was held in a properly segregated bank account with trust status,” it said.

A version of this article appears in print on June 4, 2010, on page B3 of the New York edition with the headline: JPMorgan Penalized By Regulator In Britain. Order Reprints|Today's Paper|Subscribe